Will Trump’s shipping insurance plan work?

0:01Carda Johnson:NPR.

0:11Dylan Thuras:This is the Indicator from Planet Money.

0:13Carda Johnson:I'm Darian Woods. And I'm Paddy Hirsch. Right now there's a traffic jam in the Persian Gulf. More than a thousand vessels are stuck floating in the warm sun-kissed seas of Saudi Arabia, Bahrain, Dubai.

0:25Dylan Thuras:Oil tankers, gas tankers, container ships, bulk goods carriers. They're all trapped to the west of what has become the world's most famous trade choke point, the Strait of Hormuz.

0:37Carda Johnson:And there are a lot of reasons why these ships are stuck there, all related to the war with Iran. But one of the biggest of all is insurance. On today's show, we'll learn why the world's most boring financial product has turned into a trade terrorist, hijacking the market in oil, which this week briefly soared to over$100 a barrel.

0:54Dylan Thuras:But don't worry, President Trump has a plan. We will look into a solution to open the straight and bring the price of oil back down after the break.

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1:20Dylan Thuras:Right now, Rachel Siemba says the Persian Gulf is a mess.

1:24Carda Johnson:I would describe it as a parking lot, as pathways that are frozen. These are pathways that are normally bustling that now have very few vessels going through. Rachel is a fellow at the Center for a New American Security, where she focuses on economics, finance and security issues. She says vessels aren't moving because they're worried about being attacked or seized by Iranian forces. But that's not all. They're also facing much higher insurance costs, insurance premia for their political risk insurance.

2:01Dylan Thuras:Political risk insurance, sometimes called war insurance, is a special kind of insurance to cover stuff that regular shipping insurance policies generally don't, like being hit by a missile or detained by the Iranian Navy.

2:15Carda Johnson:Yeah, because it's special and usually supplemental. This kind of insurance isn't cheap. Maximilian Hess runs a political risk consultancy called NMATANA Advisory. He says right now, war insurance is getting eye-wateringly expensive. Normally, rates for marine war insurance are in the basis points, right? They're a percentage of a percent of the value of a cargo. Here, we are very likely talking about double-digit percentage points as a minimum.

2:47Dylan Thuras:For example, about a week ago, a tanker carrying oil worth$100 million through the Strait of Hormuz would have paid about$250 ,000 in war insurance. Today, it's at least a million bucks just for the day it takes to pass through the strait.

3:03Carda Johnson:And most shipping companies don't want to pony up that much. So they're staying put. Well, most of them anyway. And this has created a level of disruption in the Gulf and global energy markets not seen since the oil embargo of the 1970s. It could end up being the worst the world has ever seen.

3:19Dylan Thuras:That said, the strait isn't entirely closed. A small number of ships do risk transiting it each day, but Rachel says many of those vessels aren't insured.

3:29Carda Johnson:Many of the vessels that are still transiting the straits are ones involved in illicit shadow trade that were already working without insurance. And were already involved in the kind of evasive techniques and tactics that allowed them to evade sanctions. Yeah, legitimate shippers, though, don't want to take the risk of sailing without insurance. And they don't want to pay the exorbitant premiums for coverage. And there's no other way out of the Gulf, of course, except by land. And that's crimping the supply of what's on these ships. Fertilizer, natural gas, and of course, oil.

4:07Dylan Thuras:Yeah, so if you haven't seen already, brace yourself for higher gasoline prices.

4:11Carda Johnson:Yes, but like a good neighbor, the Donald is here. Mr. Trump has come up with a plan to unclog the strait by offering his own war insurance at a, quote, very reasonable price. President Trump has offered to have what is called the UFC provide this kind of insurance.

4:29Dylan Thuras:The DFC, or its full name, the U.S. International Development Finance Corporation, was created during the first Trump administration. And Max says it's designed to fund ventures in countries overseas to buy U.S. goods and services.

4:42Carda Johnson:It usually takes risks like supporting the development of an LNG plant in Mozambique. Sometimes it supports things like the export of Boeing planes. Max says the DFC is not set up to take insurance risk, but it has taken a stab at this in the past. In recent years, it began offering a backstop to companies that were willing to take on the risk of insuring Ukrainian firms. And then the DFC takes that reinsurance. They say we will take$25 million of a maximum potential$100 million loss related to these products.

5:14Dylan Thuras:Reinsurance, as in insuring the insurer. In the Gulf, the DFC says it will provide up to$20 billion in reinsurance.

5:23Carda Johnson:Yeah, and Mac says$20 billion is nothing to scoff at. It could offer some cover for any American insurance companies that are willing to take on the risk of backing oil and gas tankers and other ships that run the Strait of Hormuz. It could help get shipping going again.

5:38Dylan Thuras:But right now, it's not clear how much coverage that money will actually provide. A lot will depend on the terms, and they're a little hazy. For a start, what does a very reasonable price mean?

5:51Carda Johnson:I don't think that the administration has a clear process in place for figuring out exactly what rates that it would charge.

5:59Dylan Thuras:That's because it's the insurance companies that will decide how much to charge, not the US government. and those companies could still charge shipping companies very high rates.

6:09Carda Johnson:And then there's the fact that the DFC is only providing coverage for a ship's hull, machinery and cargo. It's not providing coverage for the crew and crucially not for any environmental damage, which if a ship has hit could be considerable. That can run up to a billion dollars per ship in insurance capacity limit because oil spills can be very damaging.

6:29Dylan Thuras:The DFC insurance plan is a creative use of an obscure government department to try to solve a pressing issue, Rachel says. It's all government money, of course, and if losses rack up, it's the US taxpayer that will be on the hook. But it could work.

6:45Carda Johnson:With oil briefly spiking at more than$100 on Monday, though, it needs to work fast. And it's not yet clear how quickly the DFC can get its reinsurance plan up and running. Drawing up insurance contracts is not a simple business, after all. and the DFC doesn't have much experience or expertise in this area. DFC has basically said, we're open, call us, and we'll talk about what we can do. Ben Black, the head of DFC, and Treasury Secretary Besant talk about having financial measures in the market in a couple of days. That sounds optimistic.

7:20Dylan Thuras:Not least because the people who are going to be looking at what coverage the DFC is offering are insurance people.

7:27Carda Johnson:Yeah, you know the types, grey suits and steely eyes. You know, the kind that read the liability notice on their Instagram update from top to bottom every time. There's a number of things that haven't been resolved yet. And a number of questions about the fine print and whether companies would actually be able to collect on and be refunded the full costs. The devil's always in the details, but I would be looking particularly closely at these contracts.

7:58Dylan Thuras:The most important thing, Rachel says, will be the U.S. military's ability to make the straits safe and provide security to shipping. If it can do that, insurance costs should fall and the oil, gas and fertilizer should flow. But Max argues because of the asymmetrical nature of this war with Iran, the Strait of Hormuz is still some way from being safe to traverse.

8:20Carda Johnson:I think people need to be focusing a lot more on the long-term drone risk. Something we haven't seen yet is the Iranians really successfully deploy naval drones. The cost of a naval drone is essentially the cost of a small car. You basically need a jet ski, a Starlink or an equivalent, some kind of control system, and a bomb. And that may very well prove to be a key part of this aspect as well. Insurance is only part of the solution, in other words. it can only work when the straight is seen to be relatively safe. That's what's going to have to happen for Mr. Trump's plan to work.

8:59Dylan Thuras:This episode was produced by Kubik-Hatz-McKim with engineering by Sina Lafredo. It's fact-act by Sierra Juarez. Cake & Cannon is our editor and The Indicator is a production of NPR.

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